The Hidden Costs of Economic Incentives

Yesterday’s Asheville Citizen-Times had this article chronicling the (surprise!) poor track record of one of North Carolina’s largest corporate welfare programs.

Many companies celebrate receiving one of North Carolina’s top two kinds of economic-development grants, only to never fulfill enough of their job-creation promises to collect the money.

The state has closed the books on 26 One North Carolina Fund grants targeted to Western North Carolina jobs, but only six companies walked away with all or most of the money touted when the grant was announced, a Citizen-Times analysis found.

But central planners, such as NC’s deputy commerce secretary Dale Carroll, think the incentives game does no harm to the economy if the recipients of corporate handouts don’t live up to their promised job goals, and thus don’t receive any of the taxpayer-funded grant money.

The good news, said Carroll, who oversees incentives programs as deputy commerce secretary, is that no money will go to companies that fall short.

“We pay them following the performance or the lack of it,” he said. “It’s a built in safeguard.”

I wrote the following letter to the Asheville Citizen-Times in response to Mr. Carroll’s comments:

Dale Carroll, deputy commerce secretary, apparently believes there is no harm done to the economy with the practice of targeted corporate handouts, as long as no money is disbursed to companies that fall short of their promised job goals. (Volvo reflection: most NC job grants tumble, Dec. 21)

He is mistaken.

Our economy is an incredibly complex, dynamic and unpredictable process whereas entrepreneurs compete with each other to most efficiently satisfy consumer demand. Thus, the allocation of scarce resources such as money, labor, land, machinery and countless others are combined and directed in response to, and anticipation of, societal needs.

When politicians and government planners such as Mr. Carroll interfere with this process with targeted incentives, they distort the decisions made by the millions of participants in the marketplace. Such distortions serve to delay economic progress because the market’s resources are combined in a less efficient manner than they would have been without government interference.

More importantly, the freedom of consumers to dictate to entrepreneurs how society’s resources are allocated is whittled away by the political favoritism utilized by the likes of Mr. Carroll.

Even if no taxpayer dollars end up being given to a company, the incentives game is far from costless.

Something else the central planners will never address is the chaos left in the wake of incentives deals. Even if one of these companies “succeeds,” what are the unseen costs? The unfair advantage these companies are granted by political priveledge helps to undermine their competition. These competitors may then be forced to lay off workers or close up shop entirely.

And what about when the companies receiving incentives fail, what is left?

People are put out of work, land and buildings are left stranded, and capital equipment that were created and combined for very specific purposes are likewise left idle. These resources need to be put back to use in other purposes, and in some cases will need to be destroyed (and perhaps sold as scrap). The economic costs of having to destroy now useless capital equipment needs no explanation. Moreover, the process of re-allocating still useful resources to appropriate uses is not costless, and takes time. This process results in unemployment and idle resources, resulting in a major drag on economic progress.

But politicians and central planning bureaucrats can’t bother with such details when they can search for their next corporate handout in order to generate a press release and ribbon-cutting ceremony to convince the public that they are “creating jobs.”

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[…] II. NC Civitas has polled on economic development incentives and asserted that they are not good policy as has the John Locke Foundation. In addition, the NC Institute for Constitutional Law, part of the […]

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